Until this year, when borrowers sold property for less than they
owed, called a short sale, they could still be sued for their debt
years after the sale was complete. A state law passed this summer
eliminated that leftover debt.

But the new rule left some lenders, especially those holding
"secondary" loans, such as home equity lines of credit, with an
incentive to demand more money, backed by the threat that they'd
insist on a foreclosure. In most cases, that hasn't happened, but
secondary lenders are still demanding more money. And in one case,
a foreclosure was the result.

"It really brought everything to a screaming halt," said
James Baxter
, a
Carlsbad real estate agent. "Once July 15 rolled around, the
seconds (secondary lenders) called me up and said, 'Yeah, that
payoff letter you got? Throw it away.' Instead of wanting 10 cents
on the dollar, they wanted 50 cents on the dollar."

Before the law was passed, secondary lenders usually received
token payments to approve a short sale, typically around $3,000,
and they would often try to preserve the right to sue later. The
new law eliminated that right to sue, and as a consequence, some
started demanding more money in the short sale, or else they'd
force a foreclosure. That's exactly what happened to Tim Lester, an
Oceanside engineer.

In 2005, Lester bought his house for $1.2 million with a
traditional mortgage, and a $200,000 secondary loan to fix it up.
When the economy tanked in 2008, it took his small engineering
business with it. Lester could no longer afford $7,000 a month in
loan payments, and he decided to short-sell. He had two deals fall
through and was negotiating a third when the law was passed.

"The folks holding the second wouldn't negotiate with us,"
Lester said. "They had initially agreed to the normal amount,
$30,000. Then they came back (after the law was passed) and said
no." Instead, he said, they wanted $90,000.

Lester's primary mortgage lender got tired of dickering and
pushed the property into foreclosure. The house has since been
taken back by his bank, and Lester has to be out by Nov. 17.

Tyson
Lund
, Lester's real estate agent on the short sale, said he's
had problems with second lenders since the short-sale law
passed.

"When the new rule came in, which happened to come in right when
we were negotiating with the second, the second upped the amount
they wanted," he said. "They wanted so much money that if the buyer
was willing to do it, the first wanted it."

Lester's story appears to be an exceptionally bad outcome for a
homeowner. More often, secondary lenders ask the first for more
money, commonly around 10 percent of the value of the loan, said
Shanna
Welsh
, a San Diego attorney.

"They can sell the loan for between 5 percent and 15 percent, so
that 10 percent is in the middle," Welsh said.

Welsh and other attorneys and agents said there's a lot of
variability depending on who holds the second loan. Smaller
lenders, in particular, have a hard time managing the new rules,
said
Gary
LaTurno
, a San Diego real estate attorney.

Many local real estate agents said they've heard about stories
like Lester's, but haven't had any problems themselves.

"I kept expecting it to change, but I'm not seeing it yet,"
said
Sidney
Kutchuk
, a Temecula real estate agent who's been doing short
sales since the 1990s.

For the most part, the law has protected homeowners, and
encouraged more of them to do a short sale.

"I would say for the most part, the law has been very positive,"
LaTurno said.